Employees need to believe that they are comparably and fairly paid relative to others, both internally and externally. Luckily, employees are fairly elastic when it comes to how they make this equity calculation. It’s not just a 1:1 comparison, it is a dynamic comparison of relative inputs compared to relative outputs. That’s why a journeyman engineer does not expect to be paid the same as the CEO, even if they graduated from the same school in the same year. But even there, an overall sense of equity is expected, else dissatisfaction and disengagement results. (I have more to say on this equity calculation in Part 5 of this series.)

In the ideal world it would be a fairly simple matter to set a fair and appropriate pay package for an organization’s staff:
– Establish an internal hierarchy of jobs based on comparable responsibilities and competencies (internal equity);
– identify 10 – 12 organizations of similar size, scope and mandate, and location;
– conduct a confidential survey of current salary and benefit practices of these;
– then, depending on the organization’s own budget constraints and stated salary policy, set salaries in accordance with the information garnered and the policy stated (external equity).

In the absence of such a focused survey HR is forced to acquire as much relevant information as it can and make a best interpretation of the data for his or her organization. Simple enough, on the face of it. But balancing internal and external equity is a real art – and one of the jobs only professional HR practitioners who have the pulse of their organizations can do. HR may be a redundant profession in many respects when managers do their jobs perfectly well, but this is not one of them.

Overall I think pay practices in organizations should be based on market surveys of total compensation (base salaries plus bonuses) but that employees be paid an inclusive salary without contingency. This ‘radical concept’ even applies to occupations traditionally associated with ‘incentive’ compensation including sales people and the CEO. When employees don’t understand the basis upon which other employees are paid, feelings of inequity result. (I have more to say on ‘incentive compensation’ in Part 6 of these blog articles on Pay Practices.)

Salaries should be loosely based on relative job responsibilities but not rigid point-factor job evaluation (this despite the demands of the Pay Equity Police!). There may be a need for no more than 10 salary grades in any small to medium sized organization. Each salary grade may have a short salary range to allow for progression in the job over the initial orientation period. Employees have an instinct for internal equity; when organizations institute finely tuned multiple pay ranges it just confuses the picture.

Feelings of equitable treatment also occur when employees who grow their skills and experience are given opportunity to apply them whenever possible; when they do they should subsequently be promoted to a higher salary grade to reflect their greater contributions to the organization. Where once I was a bit doctrinaire about job evaluation and opposed to ‘maturity curve’ salary progression, I’m now thinking a hybrid system may be more efficacious. The trend to competency based pay seemed promising in this regard but is now encountering some objections. In any event, any system of pay practice needs to be thoughtfully designed and rigourously administered. Was it ever thus.

When employees feel they are equitably paid internally, and competitively paid externally, they are much more likely to focus on their jobs than on their resentments.